Your Investment Policy Statement

Have you ever wondered why we at Perspective Financial Services have annual reviews and discussions about your Investment Policy Statement (IPS)? A well-written, up-to-date IPS is a powerful communication and planning tool, with three key benefits:

  1. It allows you and your advisor to discuss and document your goals, as well as your tolerance for investment risk, to create an effective investment strategy and asset allocation.
  2. It helps clarify how and why your portfolio’s investment mix determines its performance over the long-term. (The chart below offers a good visual regarding why asset allocation is so important.)
  3. It enables you and your advisor to periodically re-visit your goals and strategy, to ensure they remain appropriate to changes in your life and needs.

An Investment Policy Statement (IPS) is a document prepared by an investment manager and their client. It states the goals and the strategy for how to reach those goals through a specific investment mix agreed upon by the client and the investment manager. It’s prevalent within the institutional investment management space and is becoming more so at the individual or retail level. Perspective Financial Services has utilized the IPS for its clients since Mike McCann founded the firm in 2003.

Your Investment Policy StatementCall or email your advisor if you have any thoughts or questions about your IPS. We’re happy to go over it with you any time.

 

By |2021-12-02T14:05:37-07:00January 3rd, 2022|Financial Planning, Investing|

Aligning Investments and Values

aligning investments and valuesEven before the 1971 founding of Pax World fund – the first socially responsible mutual fund in the United States – many people have wanted to make a difference with their dollars. The question remains, is there a practical way of aligning investments and values?

In the early days of socially-responsible investing (SRI), most of the strategies revolved around excluding “sin stocks,” primarily those associated with alcohol, tobacco, and gambling. The list of exclusionary stocks grew in the 1980s, adding oil and gas companies in the wake of disasters like India’s Union Carbide gas leak and the Exxon Valdez oil spill.

SRI has since evolved into an inclusive investment strategy with active management and deep research into companies that claim to be good corporate citizens. The emphasis is now on investing in companies with high marks for environmental issues, societal responsibility, and corporate governance (ESG).

The idea of influencing positive change in society through our investments is a noble pursuit. The premise of developing an ESG framework to analyze how a company measures up against its peers can provide a more holistic understanding of a company to complement its financial data.

There are obstacles, however, to obtaining good ESG data. Many companies are reluctant to add more data to their already long list of legally-required reporting and disclosures. Another problem is “greenwashing” – using public relations and advertising tactics to convey a more environmentally-friendly and socially-conscious image than is accurate. Plus, a standardized ESG rating system doesn’t exist; environmental issues, societal responsibility, and corporate governance have different weightings and levels of importance in each industry and to each investment analyst.

Historically, well-run companies with a holistic operational approach have always been a good long-term investment. As more companies begin to disclose accurate ESG metrics that can be more-rigorously applied to the investment process, companies with good ESG scores will ultimately attract investment dollars and prosper.

By |2021-11-09T08:51:56-07:00December 6th, 2021|Current Affairs, Investing|

Investment Lessons from the Pandemic

glass globe business. Global MarketExcerpted with permission from “5 Investment Lessons from the Pandemic” by Steve Watson, Equity Portfolio Manager at Capital Group. 

As a 30-year investing professional, the past 16 months stand out in my career as both intensely painful and incredibly instructive.  What has this most unusual time in history taught me?

  • Market crises are inevitable. The pandemic-driven stock market crisis led me to think of past market traumas I experienced. I counted 21, including the collapse of the Soviet Union, the bursting of the technology bubble, the global financial crisis, and now COVID-19. This list highlights the reality that market disruptions are a fact of life for investors. My list suggests we get one of these events every 18 months or so.
  • History doesn’t necessarily repeat itself in ways you might expect. For instance, I lived in Hong Kong through the dark days of the SARS (Severe Acute Respiratory Syndrome) epidemic in 2003. When COVID hit, I was quick to make comparisons between the two. Yet, while SARS was frightening to live through, relatively speaking, it was a fairly minor event. Drawing false conclusions about COVID based on the SARS experience left many investors unprepared for the extent and duration of this pandemic.
  • Diversification holds strong. While “growth” and “value” investment labels are overly broad, I’ll use them to make a point. I lean toward value, but I also have long-term growth-oriented investments. Many are tech-related (semiconductors, e-commerce, etc.) and I like to purchase shares when they’re down and out; I also hang on long enough to let the market catch up with what I think is the true value of the company. In hindsight, my selection of growth-oriented tech stocks saved my skin during the worst days of 2020.

Click here for a PDF of Watson’s full article. Investing Lessons Learned from the Pandemic

By |2021-08-16T13:03:34-07:00August 23rd, 2021|Current Affairs, Investing|

Cryptocurrency Risk

Mailiard-v1-WEBThe latest investment fad has arrived: cryptocurrencies. Younger, inexperienced buyers excitedly trade “cryptos” on their phones and brag about it to friends. One claims to be getting rich buying Bitcoin (the original cryptocurrency). FOMO kicks in (fear of missing out) and entices others to buy. Unfortunately, it’s rare that any fully understand what they’re doing or cryptocurrency risk.

As legendary investor Warren Buffett said, “I can say almost with certainty (it) will come to a bad ending.”

Cryptocurrency’s wide appeal is easy to understand. It’s basically digital cash that can be transferred immediately and anonymously between parties. Bitcoin trades using technology called “blockchain,” a digital ledger that is purported to be unhackable. This unique currency also isn’t bogged down by intermediaries, such as governments, banks or international currency exchanges.

Potential appeal aside, crypto trading should not be considered as investing, but rather speculation. Only those with giant appetites for risk should consider it. Stories of wild price swings abound. When the economy appeared to be collapsing due to the Coronavirus, Bitcoin fell about 65 percent – three times as much as stocks – by March 2020.

“Bitcoin is not real money now, and… without huge reforms it will never qualify as real money,” said Larry Kudlow, a noted economist formerly of CNBC and the Trump administration.

One should only risk money in cryptocurrency markets that he or she can afford to lose entirely. How many people really have “money to burn?”

In addition, the tax implications of cryptocurrency are extremely complex and shouldn’t be taken lightly.

Real, long-term investing is the time-proven path we take at Perspective. We work with our clients to first develop a written plan, a road map.  From there, we build and maintain broadly-diversified portfolios in established markets backed by many decades of risk-and-return data. The result is a less volatile and more predictable portfolio.

By |2021-05-11T19:51:30-07:00May 17th, 2021|Current Affairs, Investing|

Portfolio Management with a Broader Perspective

In this fun, informative 3-part video series, Mike McCann explains our approach to portfolio management with a broader perspective: how and why we use asset allocation to create diversified portfolios, update our list of funds quarterly, and review client portfolios monthly to rebalance if needed. Click here if you prefer to read the video transcripts.

Part 1: Creating the Right Mix of Investments

Understanding asset allocation, diversification and individual client risk tolerance (approx. 3 minutes).

Click here to read the transcript for Part 1.

 

Part 2: Fine-Tuning Our List of Funds

Conducting quarterly analysis of investment options (approx. 2 minutes).

Click here to read the transcript for Part 2.

 

Part 3: Adjusting the Sails

Performing monthly client portfolio reviews (approx. 3 minutes).

Click here to read the transcript for Part 3.

Video Transcripts: Portfolio Management with a Broader Perspective

 

Part 1: Creating the Right Mix of Investments – understanding asset allocation, diversification and individual client risk tolerance

I’m Mike McCann, president and founder of Perspective Financial Services. In this 3-part video series, I’m going to lay out in simple terms our firm’s portfolio management process. How and why we create diversified, balanced investment portfolios for our clients that take into account their individual goals and tolerance for risk.

First, let’s talk about creating the right mix of investments.

There’s a lot of financial jargon used in the media, and the terms asset allocation and diversification are especially popular among the financial lexicon. These are important, and distinct, concepts when managing risk in your investment portfolio. So what do they mean?

Asset allocation is deciding how much you want to invest in different asset classes, such as stocks, bonds and cash. Over time, this mix of investments will be your road map as financial markets move.

Different asset classes yield returns at different speeds and have different levels of risk. Therefore, diversification means more than simply dispersing one’s eggs into many baskets. The goal is to balance risk and return within a portfolio of investments.

That means dividing your investment dollars into a variety of asset classes across many industries, geographies and sizes of companies.

Within these broad investment categories, non-traditional asset classes – such as real estate investment trusts (REITs), commodities (such as energy, agriculture or precious metals) and international bonds – can provide further diversification and potentially lower investment risk.

Recurring bumps in the financial markets, often called volatility or corrections, can create anxiety and cause investors to question if a change in their investment strategy is needed.

At Perspective Financial Services, we apply time-tested asset allocation and diversification principles to balance portfolio risk and return. That way fluctuations in the markets have less impact on your investments overall. It’s like having shock-absorbers on your portfolio. The bumps in the road are less noticeable, allowing you to focus on where you’re headed rather than the occasional obstacles that need to be navigated.

While fine-tuning and adjustments are sometimes necessary to account for current events, the fundamental principles of asset allocation and diversification remain the best ways to manage risk.

Creating the appropriate mix of asset classes in your portfolio begins with understanding your feelings about risk and knowing how long you plan to keep your money in the market. An investor with a long time horizon and a high risk tolerance, for example, might have as much as 90 percent of a portfolio in stocks with 10 percent in cash; a conservative investor might hold 20 percent stocks and 80 percent bonds and cash; and a moderate investor would fall somewhere in-between.

Maintaining regular communication with your financial planner and having candid conversations will help you both understand your tolerance for risk and enable you to create an appropriate asset allocation for your investment portfolio.

In parts 2 and 3 of this series, I’ll talk about our firm’s process for monthly and quarterly review and analysis of your investments and how we keep client portfolios in balance.

Portfolio management is just one element of Perspective’s broad range of expertise and services. To learn more, watch our other videos at MoneyAZ.com, or give us a call.

Portfolio Management with a Broader Perspective

Part 2: Fine-Tuning Our List of Funds – conducting quarterly analysis of investment options

I’m Mike McCann, president and founder of Perspective Financial Services. In this 3-part video series, I lay out in simple terms how and why our firm creates diversified, balanced investment portfolios for our clients.

In Part 1, I talked about creating the right mix of investments that takes into account each investor’s unique goals and risk tolerance.

Now, let’s talk about a critical aspect of our firm’s strategic investment process – what goes on behind the scenes.

The Perspective Investment Committee meets every quarter to review and fine-tune the list of funds we use to build balanced client portfolios.

Funds are selected based on several criteria and must pass a series of “cuts” to make the list. Considerations include factors such as cost and the fund manager’s tenure, as well as overall performance and risk vs. return (both of which we compare to peer funds and other benchmarks).

The process begins when Perspective’s Portfolio Administrator conducts preliminary research and narrows the field of funds for consideration to about 30 in each category (from a universe of several thousand choices). Perspective uses two advanced industry software programs to analyze thousands of funds. We also tap into our custodian’s institutional website, to which individual clients do not have access, and obtain additional fund data.

Funds already on our list are reviewed for any changes, such as new management, increases or decreases in returns, or changes in expenses or risk. Funds that no longer meet our strict criteria are removed from the list. Likewise, new funds are discussed and, when appropriate, added to Perspective’s list of approved investments.

With our updated fund list in hand, our team of advisors reviews and updates their client portfolios.

In Part 3 of this video series, I explain our monthly client portfolio review and rebalancing process.

This is just one element of Perspective’s broad range of expertise and services. To learn more, watch our other videos at MoneyAZ.com, or give us a call.

Portfolio Management with a Broader Perspective

Part 3: Adjusting the Sails – performing monthly client portfolio reviews

I’m Mike McCann, president and founder of Perspective Financial Services. In parts 1 and 2 of this video series, I talked about why and how our firm creates diversified, balanced investment portfolios for our clients that take into account their individual goals and tolerance for risk.

In this final installment, I’ll address the importance of monthly portfolio review and occasional rebalancing.

Choosing investments and creating an appropriate mix is only the beginning when it comes to managing a portfolio. The financial markets are changing all the time. This fluctuation in performance alters the values of the different asset classes in a strategically diversified portfolio. Thus, as the wind inevitably will blow, it’s important to adjust the sails of your portfolio from time to time through rebalancing. This involves reviewing the portfolio and buying or selling assets to maintain the original, desired level of asset allocation.

William Arthur Ward said, “The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”

How often should you review and rebalance a portfolio to achieve and maintain this efficiency? There is no official rule or industry standard that determines when or how often a rebalance is required. Some advisors believe an annual review is sufficient. Others review quarterly. At Perspective Financial Services, we review client portfolios monthly.

While a rebalance may not always be necessary, we believe consistent, frequent review is a key to long-term success.

Your portfolio’s overall progress should be enough to support and achieve the financial goals you’ve set. The objective is to see steadily increasing value of the portfolio, even if one or more of the investments may have lost value. The proven method of achieving this objective is not to complain about market fluctuations or to hope the markets will calm. It’s to keep an eye on the horizon and adjust the sails when needed.

For the sake of example, let’s say your optimal portfolio requires an even mix of large-cap and international stocks. Now consider a major market shift in which large-cap stocks soar and international stocks drop. This alters the mix of investments in your portfolio, which means it’s time to rebalance to help ensure the optimal asset allocation.

We maintain balance in a number of ways. One approach might be to direct future investment funds into the underrepresented category, international stocks in this example. We also might sell some of the largely appreciated assets and redirect the dollars from those sales to the purchase of undervalued stocks.

This keeps your portfolio in balance, while maximizing growth potential for the money you invest.

Maintaining the appropriate asset allocation is a critical key to staying on track with your long-term financial goals.

Portfolio management is just one element of Perspective’s broad range of expertise and services. To learn more, watch our other videos at MoneyAZ.com, or give us a call.

By |2020-12-02T12:34:44-07:00December 1st, 2020|Investing, Video Blog|